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Increase of illicit trade and counterfeit cigarettes after introduction of plain packaging

A year ago, on 1 December 2012, Australia was the first country in the world to introduce plain packaging legislation which standardised the packaging of tobacco products by requiring that brand names are only present in a standard font and excluding any other graphic or text elements by which manufacturers can express their brand identity.

We have previously reported on the challenges this legislation faced under the Trade Related Aspects of Intellectual Property Rights Agreement, the Paris Convention and the Australian Constitution in the August 2011 and September 2012 issues of Food Law Digest.

One year on, it is interesting to look at the experience of plain packaging in Australia and its effects. This experience is particularly relevant in the light of the European Parliament vote on 8 October this year on a revision of the Tobacco Products Directive in which full plain packaging was rejected but which allowed Member States to introduce plain packaging, with the (we say, very large) qualification that any such measures would have to comply with EU law. There are also discussions in other countries about introducing similar legislation, for example, the UK Government announced on 28 November 2013 that it would conduct an independent review of the public health evidence on standardised packaging of tobacco products.

Evidence from Australia

A recent KPMG study, Illicit Tobacco in Australia, published in October 2013 found that consumption of tobacco has not decreased since plain packaging took effect in December 2012. This was the first time since 2009 that tobacco consumption in Australia did not decline year on year. The level of illicit consumption of tobacco also reached record levels, growing from 11.8% to 13.3% from June 2012 to June 2013, the key driver of this growth being a large increase in the consumption of illegal, branded cigarettes, primarily in the form of contraband. Consumption of counterfeit cigarettes has also increased. If all of this tobacco had been consumed in the legitimate market it would have represented an excise amount payable to Government of AUD 1.0bn at current excise rates.

These results thus show that there is no credible evidence that the far reaching measure of plain packaging would actually work in terms of reducing smoking, but moreover evidence now shows that such measures have serious downsides when it comes to illicit trade of cigarettes. The introduction of plain packaging would involve huge costs for governments in terms of lost taxes and extra investments in the fight against counterfeit tobacco products.

Earlier this year the Association Internationale pour la Protection de la Propriété Intellectuelle (AIPPI) published a Summary Report on its Plain Packaging Questionnaire[1]which noted that the AIPPI Australian group had already predicted an increase in the prevalence of counterfeiting. This concern was shared by the customs and law enforcement authorities in Australia.

In fact, in a position paper for Philip Morris published by Bird & Bird's Manon Rieger-Jansen and Wouter Pors in May 2013, this effect was also predicted. Whilst the KPMG report does not evaluate why Australia has seen this increase in illicit tobacco consumption, these results were to be expected since plain packaging means standardized packaging without any device marks, with only the brand name allowed in standard font, factual information concerning the product content and health warnings printed on the packs. All packaging will thus be made uniform which will make counterfeiting much easier. After all, it becomes simpler to reproduce the packaging, cheaper to produce counterfeit and more difficult to identify them (both for consumers and customs). It could not have been made easier for producers of counterfeit cigarettes! The KPMG report now provides factual evidence for this prediction.

First tobacco products, then what?

Currently there are discussions on taking health warnings and plain packaging even further. The industries most likely to be targeted next are alcoholic beverages and food products containing fat, sugar or salt, which the World Health Organisation (WHO) has stated are prime candidates for stronger regulatory controls.

Although consumers are entitled to accurate and clear information in order to make informed choices, which are actually supported by industry, deprivation of intellectual property rights by plain packaging requirements not only are unjustified encroachments on those rights, but based on the recent KPMG report, they can also fail to have a public health benefit whilst resulting in unintended consequences. It should be noted that under the European Convention on Human Rights, a credible public health effect is a condition for limiting the exercise of intellectual property rights.

Should plain packaging be extended to the food industry this will indeed have far-reaching impacts on owners of any intellectual property rights since plain packaging severely limits the possibility of right owners to use those rights. Obviously this has immediate effect on the attractiveness and appeal of the products offered. Can you imagine stepping into a store with a craving for chocolate and not being able to identify your favourite brand as you are walking down the aisle?

The main justification for plain packaging in relation to tobacco products is that it will lead to a decrease in consumption. However, the recent KPMG report shows that the consumption of tobacco has not decreased in Australia. Would this be different for the consumption of drinks or food? We doubt it.

Let’s hope that that this new evidence will not be ignored so we can all enjoy informed consumer choice, including eating a KitKat every now and then.

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